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The Illiquidity of Water Markets

Javier Donna and Jose-A. Espin-Sanchez

MPRA Paper from University Library of Munich, Germany

Abstract: We investigate the efficiency of a market relative to a non-market institution—an auction relative to a quota—as allocation mechanisms in the presence of frictions. We use data from water markets in southeastern Spain and explore a specific change in the institutions to allocate water. On the one hand, frictions arose because poor farmers were liquidity constrained. On the other hand, wealthy farmers who were part of the wealthy elite were not liquidity constrained. We estimate a structural dynamic demand model under the market by taking advantage that water demand for both types of farmers is determined by the technological constraint imposed by the crop’s production function. This approach allows us to differentiate liquidity constraints from unobserved heterogeneity. We use the estimated model to compute welfare under market and non-market institutions. We show that the institutional change from markets to quotas increased efficiency for the farmers considered.

Keywords: Market Efficiency; Dynamic Demand; Auctions; Quotas; Vertical Integration; Financial Markets (search for similar items in EconPapers)
JEL-codes: D02 G14 L11 L13 L42 L50 Q25 (search for similar items in EconPapers)
Date: 2021-04-05
New Economics Papers: this item is included in nep-agr, nep-com, nep-cwa, nep-des, nep-env, nep-isf and nep-reg
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Related works:
Working Paper: The Illiquidity of Water Markets (2014) Downloads
Working Paper: The Illiquidity of Water Markets (2014) Downloads
Working Paper: The Illiquidity of Water Markets (2014)
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